Question

1. Reasons against FDI inflow:
   1. List and explain four major reasons that opponents often use to limit expansion of FDI/MNCs into host countries around the world.
   2. List and explain four major reasons that opponents often use to limit outflow of FDI/MNCs from a home country.
   3. Comparing costs and benefits of FDI to a home and a host country, which of these countries benefit the most? The home or host country? Explain why.

Answer 1

A.

Four major reasons are as follows:

1. Destruction of local industries  (infant industry argument)

2. Harm to the national defense

3. Exploitation of resources, hurting the domestic economy

4. Increased level of unemployment

First reason to oppose is that FDI or MNCs (multi-national company) will bring sophisticated products that can capture the local market and domestic industries will not be able to compete against these MNCs. It will hurt the domestic economy and it will be dependent upon foreign players. The second reason is entry of these MNCs or foreign enterprises are going to hurt the national defense as sensitive information can be passed on to some other nations. The third reason is the lack of regulatory  framework that cannot control the exploitation and corrupt practices of the companies coming via FDI or any other mode. It will create inefficiency and domestic economy will be in losses. The fourth reason is the increase in the unemployment rate as MNCs will bring operations that are technology driven and local workforce is not adapted to that technology. It will create unemployment in the economy.

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B.

Four reasons to restrict the outflows are as follows:

1. Protect jobs in the home country

2. Increase investment and expansion in the home country

3. Limit the global sourcing

4. Increase exports to the host countries

The first reason is to protect jobs as restricting MNCs, will cause them to produce in the home country and it will create more job opportunities. The second reason is the expansion of home economy as MNCs will invest more in domestic economy. It will help GDP grow. The third reason is the limitation of global sourcing that prevents creation of jobs in the home country. So, lack of global sourcing, will make MNCs to produce in home country and create jobs. The fourth reason is to make exports opportunities from home country to another country to expand the economy. It will create more benefits to the home country, than that of the host country.

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C.

It is the host country that benefits the most, because it gets industrial development, expansion and development of infrastructure, creation of new jobs and technology spill over in the host country as benefits. These benefits are much more than cost incurred in terms of loss to the domestic industries, job loss or exploitation. Here, it is only the national defense argument that has to be taken care of and not allow suspected MNCs. Otherwise, government of the host country, should develop a strong regulatory framework that FDI takes place as per the laws and economic rent, corrupt practices and exploitation do not happen in the economy. So, it is host country that benefits more from FDI than the losses.

In contrast to it, home country also gets benefits as MNCs transfer their profit to the home country. But, in terms of development and growth opportunities creation, host country benefits more from FDI.